Sometimes the best healthcare stocks are hiding in plain sight. They may not be the largest companies or make the most news, but instead consistently produce strong numbers. The best part about stocks such as these is they're bargains because they're not necessarily household names.
Two that stand out right now are Novartis (NVS 1.02%) and Meridian Bioscience (VIVO). Novartis has an impressive pipeline and a generous dividend and yet its shares are down more than 5% this year. Meridian Bioscience isn't as overlooked, but its shares should be doing even better considering the company's back-to-back years of record revenue.
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Novartis is too good to pass up
Swiss pharmaceutical company Novartis operates in three segments: innovative medicines, generics and biosimilars (under the Sandoz label), and nuclear medicine. Novartis has increased its revenue by only 1.74% annually over the past decade, but there are reasons to think it may be shaking off that sluggishness.
In fact, its research and development spending is paying off with a deeper pipeline. In 2021, the company grew sales by 6% year over year to $51.6 billion thanks to a solid performance by the company's innovative medicines segment, which increased sales by 8% over 2020. Novartis spent $8.6 billion last year on innovative medicines R&D, up 6.4% from a year earlier.
One of the biggest gainers in the segment was heart medication Entresto with a reported $3.5 billion in sales in 2021, up 42% year over year. The other was Zolgensma, a gene therapy for pediatric patients with spinal muscular dystrophy; it posted $1.4 billion in sales in 2021, up 47% over the same period in the previous year.
Earnings per share (EPS) in 2021 were $10.71, up 202% although much of that was because Novartis divested its $20.7 billion stake in Roche Holding. That divestiture is the main reason that Novartis now has only $900 million in debt, down from $24.5 billion a year ago.
The company's biggest-selling drug, Cosentyx, had $4.6 billion in sales in 2021 and was recently approved as the only biologic to treat two forms of juvenile idiopathic arthritis -- enthesitis-related arthritis (ERA) and juvenile psoriatic arthritis (JPsA). On top of that, Novartis has 20 therapies in its pipeline that could be approved by 2026; if so, the company estimates they would bring $1 billion in sales.
While waiting for those assets to pay off, investors benefit from Novartis' quarterly dividend, which it just raised by 3.3% to $2.18 per share. That was the 25th consecutive yearly dividend increase, making the stock a freshly minted Dividend Aristocrat. The dividend currently yields a hefty 4.07%, nearly triple the S&P 500's average dividend of 1.27%. Considering that fourth-quarter EPS was $7.29, the dividend appears safe.
The company offers a great opportunity because it is, I believe, priced far below its value. Its price-to-earnings (P/E) ratio is 8.6, well beneath the average trailing P/E of 19.5 for the pharmaceutical sector.
Meridian Bioscience is a quiet, steady performer
Meridian makes and sells diagnostic test kits, purified reagents, and other technologies for early diagnosis and the treatment of medical conditions. The biggest part of its business is making diagnostic assays for gastrointestinal and respiratory infectious diseases and parasitic infectious diseases.
The Cincinnati-based company had a second consecutive record year in 2021, exceeding its original guidance for revenue and net income. It reported annual revenue of $317.9 million, up 25% over 2020, and adjusted diluted EPS of $1.66, an increase of 55% year over year.
The small cap reported its fiscal 2022 first quarter on Feb. 4. While revenue fell 5% year over year to $88.3 million, that was still Meridian's second-best quarter ever, and it was up 15.8% sequentially. The company has two segments: life science, which had $55.1 million in revenue, down 12% year over year, and diagnostics, which reported revenue of $33.2 million, up 10% over the same period in 2021.
All but one of the diagnostic tests saw improved revenue, led by a 40% gain in GI diagnostics and a 33% gain in respiratory diagnostics. The life science segment's tumble was led by a 32% drop in revenue from molecular reagents.
The company also updated full-year guidance for revenue between $315 million and $330 million, and EPS of $1.10 to $1.30; at the midpoints, this means that it expects an 8.5% rise in revenue but a 27% drop in EPS.
Notably, Meridian's COVID-19 testing materials have brought it more long-term clients. In 2018, the company had seven clients that each provided at least $1 million in sales; today, it has 40 clients each with sales of $1 million or more. Meridian will still benefit from its COVID testing assays for a long time, but the bigger point is that its assays are now on clients' radars.
VIVO EBITDA (Annual) data by YCharts.
The company's stock is up more than 24% this year, but its P/E of 18.6 is still quite reasonable.
Making a good long-term choice
Meridian and Novartis are different healthcare companies, but each has grown earnings before interest, taxes, depreciation, and amortization (EBITDA) by 126% or more over the past five years, well above the average pace of the S&P 500. Meridian is overlooked not so much because of its fundamentals, but because it's still a relatively small company. Novartis is starting to see bigger revenue gains, and its pipeline should add to those gains. Both companies are underpriced, providing an opportunity for investors to get in and hold on for long-term returns.
